Whether your personal injury settlement is due to a car or truck accident, slip and fall incident or other injury claim, you’ve waited as your case makes its way through the process. Many injured victims have questions about what happens once a settlement is agreed upon or a verdict rendered. Is the compensation received from a personal injury settlement taxable? In this blog post, we walk through how personal injury settlements work after your case is resolved and what income tax issues you should consider and discuss with your attorney.
Timeline of a Personal Injury Settlement
Once your case is resolved, you will be required to sign a settlement release form. By signing the release, you are accepting the settlement and therefore releasing any other claims against the defendant related to the incident. Hopefully, you’ve had the expertise of a skilled personal injury lawyer by your side, throughout your case. If you haven’t, you should make absolutely sure you understand all terms of the settlement. After you sign this form, you can never reopen the case or try to file a claim for additional compensation.
Once the settlement release form is signed, the insurance company typically sends the check to your attorney who then pays any liens and other fees that were part of your case, such as unpaid medical bills and child support, attorney fees and other expenses related to your case. The remainder is then sent to you. Depending on your agreement, you may receive your settlement as a lump sum or in a structured settlement.
Are Personal Injury Settlements Taxable?
Generally, the settlement from a personal injury lawsuit is not taxable at the federal or state level. The IRS excludes compensation received as a result of personal physical injuries or illness from the taxpayer's gross income. Regardless of whether or not you came to a settlement through negotiation or if the award was part of a trial verdict, the award is not taxable.
Personal Injury Settlements: What is Taxable?
While a personal injury settlement is not taxable broadly speaking, there are exceptions to the rule.
There are different types of damages that could be awarded in your claim. Most often, claims include compensatory damages that include compensation such as medical expenses, lost income, as well as pain and suffering. These types of damages are not taxable.
Punitive damages, on the other hand, are designed to prevent others from being hurt or injured in the same way and are typically reserved for cases involving the most reckless and intentionally negligent behavior. Compensation awarded from punitive damages is taxable.
You may receive interest as part of your settlement claim for the time for which your case is pending. For instance, interest would be calculated on your settlement amount for 18 months if you filed your claim on January 1, 2020, and then it was resolved on July 31, 2021. The interest you receive is taxable.
One caveat in the federal tax law is that personal injury settlements are not taxable for physical injuries or illness. If your claim is for emotional injuries only, the damages received would be taxable. If your lawsuit is filed using breach of contract as a legal argument, the damages would be taxable.
A skilled personal injury lawyer will structure your claim and any lawsuits with your best interest in mind. This may include ensuring the settlement agreement details what amount of the settlement relates to the personal injury claim and what amount of the settlement relates to the non-personal injury claim so that your tax liability is very clear.
Brandon J. Broderick is Here for You 24/7
At Brandon J. Broderick, Attorney at Law, we believe in exceptional client care, empathy, and results. That’s what makes us one of the top-rated personal injury law firms in the area. With offices in New Jersey, New York, Connecticut and Florida, we’ve got you covered. If you need help getting full and fair compensation for your injuries after an accident, contact us today for a free consultation.